The stock market is like a casino, as the saying goes. The rollercoaster rides on the markets are almost impossible to understand. It is pure luck and chance whether you get rich. You can lose everything, whether at roulette, blackjack, or on the stock exchange. Especially with leveraged derivatives, you can quickly lose everything if you are wrong. So, for any gambling experience, like for the daily football predictions at 22bet, you must be prepared.
Thanks to inexpensive trading apps, young people are busy gambling. Greed and the dream of making money quickly on their smartphones make them forget the risks. There is hardly any financial education, so the youth boom on the stock market will also produce many losers. Trading apps are not computer games.
But is trading gambling? Are traders greedy speculators? Is the stock market a gambler’s paradise? It’s the other way around: traders and investors can learn a great deal if they trade from the perspective of a casino.
PLAYING FIELDS FOR GAMBLERS
Admittedly, There are similarities between gambling in a casino and short-term stock market trading. We use our own money to increase it. There is no guarantee. The outcome of every trade and game is uncertain and unpredictable. If the bet works out and you are right, you can expect high profits. The higher the risk, the greater the potential profit. If you are wrong, you lose the entire stake. This thrill is part of gambling. The time horizon is very short; the quick profit and the adrenaline rush for a few hours are the drivers. Even very short-term market players such as scalpers and day traders usually hold many positions for a few hours or even just minutes.
In the casino, it’s always about the next game. The result is evident when the dice are rolled. The game is over. A new game begins. Traders, on the other hand, trade on different time levels and manage the risk of their positions over time. The playing time may extend far beyond the day of the game. The holding period is individual and freely selectable. Rule-based trading has little to do with gambling.
THE SECRET OF CASINO SUCCESS
A completely different perspective is much more exciting: For traders, it is worth taking a look at the casino. More precisely, a look at the casino’s cards. The decisive factor is the change of perspective from the player to the casino operator. Because at the end of the day, the bank always wins, as the saying goes.
Why is that the case? Quite simply, because the operators have an excellent command of mathematics and playing with probabilities. On the roulette table, for example, there are 36 alternating red and black number compartments on the rotating wheel and another green compartment for the number zero. This zero gives the casino a banking advantage. It is by no means the case that the odds for the players are 50:50, regardless of whether they bet on red or black. If the roulette ball falls on the number zero, everyone inevitably loses, except those who have bet on zero. The player’s chances of winning are 48.6%, while the casino’s are 51.4%. The “house” has a small statistical advantage due to the green zero. In the USA, the bank advantage is even more significant than in roulette in Europe, as there is also a double zero.
THE LAW OF LARGE NUMBERS
The more often the game is played, the closer the casino gets to the calculated expected value. This is where the law of large numbers comes into play. The statistical advantage becomes apparent at the end of the evening after hundreds of games. The casino wins. The players who are always staring at the next game and do not know the probability distribution are at a disadvantage. The law of large numbers applies to all games of chance, whether roulette, card games, or dice games.
What do traders learn from this? It’s not the next trade that counts but the sum of all trades at the end of the day. That is the perspective of the casino. A paradigm shift in the stock market? Successful traders know that the outcome of the next trade is neither predictable nor important. They concentrate on implementing a trading strategy with a positive expected value.
BLACKJACK
In the card game blackjack, players also have this disadvantage because the rules of the game are designed so that the “house” has a slight advantage. However, if you can remember which cards have already fallen, you can calculate your probability of winning. This has nothing to do with gambling but the cognitive ability to gain a small advantage, which comes into play after a sufficient number of games. However, casino operators do not like these memory skills and like complimenting professional players out of the house.
Incidentally, in the large casinos in Las Vegas, the gaming tables are constantly monitored, and the number of wins and losses are noted. If the measured probability deviates too much from the expected value, the dice or cards are replaced. Better safe than sorry.
THE UNDERESTIMATED DANGER OF LOSING STREAKS
Back to the roulette table: it is pure chance whether the ball falls on black or red in the next game. Even if black has come up three times in a row, this does not mean that it will be red the next time. The individual games are not correlated, i.e., independent random events. There is no law of equalization that says when the “backlog” will be made up.
Many players like to be misled by this. This also applies to traders who are firmly convinced that after three losing trades in a row, a winning trade must finally come and risk everything. The empirical truth is that four losing trades in a row occur with a probability of 6.25% (assuming a trading strategy with a 50% probability of winning). The frequent trader must always expect a series of losses. This is not a conspiracy but simple financial mathematics. That is why money and risk management are so important.
